Baker Hughes Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited. Baker Hughes is an energy technology company reporting through Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET).
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $6.315 billion | $5.047 billion | $12.030 billion | $9.882 billion |
| Operating income (loss) | $514 million | $(25) million | $952 million | $253 million |
| Net income (loss) attributable to Baker Hughes | $410 million | $(839) million | $985 million | $(767) million |
| Diluted earnings (loss) per share | $0.40 | $(0.84) | $0.97 | $(0.79) |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $1.320 billion | $393 million |
- Q2 revenue increased 25% year over year. OFSE revenue rose 20% to $3.877 billion; IET revenue rose 34% to $2.438 billion.
- Q2 segment operating income was $417 million for OFSE and $311 million for IET, versus $249 million and $236 million, respectively, a year earlier.
- Six-month operating cash flow improved, with management citing net income and strong progress collections on equipment contracts. Investing cash outflow was $414 million; financing cash outflow was $550 million.
- Capital expenditures were $587 million for the first half, compared with $494 million in 2022. Dividends paid were $384 million; share repurchases were $99 million.
Financial position and liquidity
- At June 30, 2023, cash and cash equivalents were $2.805 billion, versus $2.488 billion at December 31, 2022.
- Total debt was $6.644 billion, including $797 million of short-term and current debt and $5.847 billion of long-term debt. The next debt maturity was $649 million of senior notes due December 2023.
- The company had no borrowings under its $3 billion revolving credit facility or its authorized $3 billion commercial paper program; it reported compliance with debt covenants. The revolving facility matures in December 2024.
- Current assets were $15.806 billion and current liabilities were $12.311 billion. Inventories were $4.957 billion; progress collections and deferred income were $5.101 billion.
- Cash held outside the U.S. was approximately $2.1 billion; $623 million was held in countries with currency controls. Management said the restricted funds support local operations and growth.
Material changes and unusual items
- Profit swung to income from a loss in the comparable 2022 periods. Results benefited from higher activity and volume in both segments and substantially lower Russia-related charges than in 2022.
- Other non-operating income was $158 million in Q2, including a $148 million net gain from changes in fair value of certain equity investments. For the first half, other non-operating income was $544 million, including a $540 million equity-investment gain. These valuation changes contributed materially to reported earnings.
- Restructuring, impairment and other charges were $102 million in Q2 and $158 million for the first half, down from $371 million and $441 million, respectively, in 2022. Prior-year charges included suspension of substantially all Russia operations and related impairments.
- Q2 2023 restructuring charges primarily reflected employee termination costs and location exits to reorganize the business and rationalize manufacturing supply chains. The company expects approximately $45 million of additional restructuring charges in the second half of 2023, with the plans expected to be substantially complete by year-end.
- In April, Baker Hughes acquired Altus Intervention for a total first-half net cash consideration of $282 million and sold Nexus Controls to GE, receiving total first-half disposition proceeds of $293 million. Acquisition fair-value allocations remain preliminary.
- Remaining performance obligations were $31 billion at June 30: $3.5 billion in OFSE and $27.5 billion in IET. Management expects to recognize approximately 60% within two years, 74% within five years, and 90% within 15 years.
Outlook, risks and contingencies
- Management expects international and offshore upstream spending growth in 2023 to offset North American softness, and describes its outlook as subject to volatile market conditions. North American activity was trending lower, particularly among private operators and in gas basins; international activity was expected to grow strongly year over year.
- Management remained positive on long-term LNG demand and natural gas, and expects growth in new-energy businesses including hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. No specific consolidated revenue or earnings guidance was provided in the filing text.
- 2023 capital expenditures are expected to be up to 5% of annual revenue; income tax payments are expected to be $500 million to $550 million. Management said cash, operating cash flows and available borrowing facilities should support expected business needs, subject to market conditions.
- Risks include commodity-price and economic volatility, customer spending changes, inflation and cost productivity, customer payment delays, foreign exchange and cash-transfer restrictions, and geopolitical developments. Management cautioned that significant revenue declines or cost increases could pressure cash flow and liquidity.
- Pending matters include an arbitration related to a Nigeria project and a securities class action involving C3.ai in which Baker Hughes and its CEO are named. The company said it cannot predict the outcomes. It does not expect currently pending legal proceedings, in aggregate, to materially adversely affect results, financial position or cash flows, while noting outcomes remain uncertain.
- Off-balance-sheet arrangements, including guarantees, letters of credit and surety bonds, totaled approximately $5 billion; the company said these were not expected to have a material effect on its financial position, results or cash flows.
Investor verification points
- Separate underlying operating improvement from the substantial equity-investment fair-value gains included in non-operating income.
- Track segment margins and cost productivity against inflation, mix, R&D spending and the expected North American slowdown.
- Monitor refinancing of the December 2023 notes, the December 2024 revolving facility maturity, and the company’s liquidity and debt levels.
- Assess whether progress collections and the $31 billion performance-obligation balance convert to revenue and cash flow on the expected schedule.
- Follow restructuring completion and costs, the Altus acquisition integration, and the outcomes of the disclosed legal proceedings.